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What is Inflation? – Market Update 8/18/2022

What Is inflation?

Put simply, inflation is an increase in the price of goods and services over time which equates to a decrease in the purchasing power of your dollar. What a dollar could buy in 1950 takes about $10 to purchase today.

What causes inflation?

There are generally two types of inflation: demand-pull and cost-push inflation.
Demand-pull inflation: During a time of economic expansion, growth and increased income cause an increase in demand for products and services that exceeds the current supply. Any time demand outpaces supply, companies can charge more for their products and services without losing customers.
Cost-push inflation: This is caused by a shortage in labor or materials required to make the products people need. This leads to a shortage in supply and again the supply demand curve is offset and prices increase.

How is inflation measured?

Inflation is measured by the Consumer Price Index (CPI), a number that measures the change in the price that the average American family pays for a predefined set of about 80,000 goods and services. This is referred to as the market basket and represents the goods and services purchased by an average American family in a year in about 200 categories. Approximately 7,000 households participate in a Consumer Expenditure Survey, providing details about their income and expenditures to the United States Bureau of Labor Statistics. They use this information to chart the change in price over time and this is the number we refer to as inflation.

Where are we now?

We recently experienced the perfect storm from the Covid pandemic. Factory shutdowns caused significant reduction in production and shipping leading to cost-push inflation. This was compounded by everyone being stuck at home unable to spend as usual. The average household amassed an increase in savings which resulted in a rebound of major spending as soon as we were allowed back out of our homes resulting in demand-pull inflation. Prices for food have gone up 12.2% for eating at home and 7.7% for going out to eat since last year. Gasoline prices increased 60%, the largest single year increase since 1980. Prices for new vehicles went up 11.4% and used vehicles went up 7.1%. Overall we were up 8.5% in July, the highest since 1981!

Inflation Can Diminish The Purchasing Power Of Your Retirement Accounts

Inflation can cause a serious issue in retirement savings. It can slowly drain the purchasing power of your retirement dollars. For example, from 1999 to 2019, the S&P 500 averaged 5.9%. This means that if you invested in stocks through your 401k or IRA in 1999 you would experience a loss after paying taxes. Even as the dollars in your accounts increase over time, the higher the rate of inflation, the more purchasing power you lose.

Can you protect yourself from inflation?

The best way to protect your retirement savings is to invest in assets that increase at a rate equal to or greater than inflation. Income producing properties allow you to build inflation rate increases into your rental agreements to ensure that your income increases as inflation increases. Additionally, due to the housing shortage and increase in costs of purchasing, rents are continuing to rise. Rents are up this year by 11.3% nationally and an average of 30% in more desirable areas.
Another inflation benefit to real estate investing is that when you buy a property with a fixed interest rate, the monthly payment is based on the value of the dollar at the time. Over time, your income increases, so that the payment is less of a burden. The more inflated the dollar, the more wages increase and the easier it is to make the mortgage payments.

When should you buy and are prices going to drop any time soon?

Nationally there are currently 2-3 million fewer homes than people looking for a home so prices are only adjusting slightly despite increased mortgage rates. Rent prices are continuing to rise as household formation is significantly outpacing inventory. We are in an environment where there is no immediate resolution to the supply and demand issue. We simply don’t have enough homes for sale. Trying to time the market is a strategy that simply doesn’t work long term. The most proven strategy for building wealth is to invest as soon as you can afford to.
Here’s the numbers from our local market this week:
We had no new condos and 3 new homes come onto the market this week. We currently have 35 active condos ranging from $377,000 to $3,200,000; the median condo price is $825,000. We currently have 52 active homes on the East Shore ranging from $630,000 to $64,500,000 with the median price of $2,899,999. Here’s a year to date local update:

Local East Shore Lake Tahoe, Nevada Stats – All Year to Date

Total Sales YTD:
Condos: 63 (↓16% YOY) | Homes: 57 (↓49% YOY)
The Median Sales Price:
Condos: $687,500 (↑4% YOY) | Homes: $1,700,000 (↑4% YOY)
Number of Sales Over $1 Million:
Condos: 13 = 20% (↑6% YOY) | Homes: 48 = 84% (↑7% YOY)
Highest Priced Sale:
Condos: $5,665,500 (↓6% YOY) | Homes: $32,000,000 (↑52% YOY)
Median Price Per Square Foot:
Condos: $594.82 (↑13% YOY) | Homes: $625 (↑3% YOY)
Median Days on the Market:
Condos: 69 (↑25% YOY) | Homes: 76 (↑5% YOY)
List to Sell Price:
Condos: 99% (↓4% YOY) | Homes: 96% (↓3% YOY)
Price Reductions this Week:
Condos: 2 | Homes: 4
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